From the Hotline: HSA, HFSA, and COBRA Continuation Coverage
Question: Our company provides an annual non-elective health savings account (HSA) contribution of $800 for our employees. For those employees entitled to Medicare and not eligible for an HSA, we provide an $800 health flexible spending account (HFSA) contribution to the employee and allow employee contributions up to the 2015 HFSA maximum of $2,550. If a Medicare-eligible employee terminates employment, can he COBRA his HFSA election and must the employer HFSA amount of $800 be continued under COBRA? Does the HFSA balance that is being continued extend through the entire COBRA period or just the initial plan year in which the employee terminated?
Answer: The Consolidated Omnibus Budget Reconciliation Act (COBRA) applies to group health plans, including a health flexible spending account (HFSA) which is a group health benefit. Standard COBRA rules regarding qualified beneficiaries, qualifying events, notices, and election periods apply to cafeteria plan HFSAs, including employee and employer contributions, on the same basis as for other group health benefits. If the HFSA is an “excepted benefit,” however, the employer can limit the COBRA maximum continuation period.
An HFSA is an excepted benefit, as defined under federal law, only if it meets both of the following conditions:
- The HFSA maximum annual benefit does not exceed two times the employee’s salary reduction amount (or, if greater, the salary reduction amount plus $500); and
- The HFSA participant (employee) also is eligible — whether or not actually enrolled — for another group health plan that complies with the requirements under the Affordable Care Act (ACA). (The ACA prohibits annual dollar limits on essential health benefits and requires nongrandfathered plans to cover certain preventive care services at 100 percent.)
You are making a non-elective contribution of $800 annually to HFSAs for certain employees, regardless of whether the employee elects to make salary reduction contributions. Review this matter with legal counsel as it appears the employer’s HFSA may fail to meet the definition of an excepted benefit. Non-excepted health benefits are subject to requirements under the ACA, including the requirement to cover certain preventive care services at 100 percent. For details, you and your legal counsel should review IRS Notice 2013-54.
Assuming that the HFSA does meet the definition of an excepted benefit, the COBRA continuation period may terminate at the end of the year in which the qualifying event occurs (instead of the usual 18 months following termination of employment). In addition, COBRA is not required to be offered if the employee’s HFSA is “overspent” at the time of the qualifying event. The HFSA is overspent if the remaining annual limit (i.e., annual election amount minus claims already reimbursed) is less than or equal to the COBRA premiums that would be required for the rest of the year. For instance, assume the employee had elected $1,200 for a calendar-year HFSA, made $1,000 in eligible claim reimbursements, and then terminated employment on June 30. The HFSA was overspent since the remaining annual limit of $200 is less than the amount of COBRA premiums ($600) that would be due for July through December. Employers may offer COBRA even if the HFSA is overspent, although they are not required to do so.
Reference: 26 C.F.R. Parts 54 and 602, Section 54.4980; “Continuation Coverage Requirements Applicable to Group Health Plans; Final Rule.”